Big Investors Wait and See as Interest Rates Reduce Appetite

8 July 2022

According to RESourceData, real estate transactions in key commercial markets in the second Quarter have dropped by -23% on the prior corresponding period to $11.7bn.

Sales across Office, Retail, Industrial and Development sectors (above $5m) have however increased from just under $10bn last quarter, but remain well below a typical 2nd Quarter.

The actual number of transactions recorded by RESourceData in the Quarter was 15% higher with 306 major transactions in Q2, 2022 versus 267 in Q2, 2021, reflecting a change in the mix of assets sold. The latest results reveal that the average price of assets sold has dropped from $58m in 2021 to $38m in Q2, 2022.

The statistics show that the reality of higher interest rates is causing larger investors to re-evaluate pricing for assets across all sectors, with smaller private investors continuing to be active, particularly in the Retail and Industrial markets.


  • The Office market has had a consistent level of activity for the past 5 quarters with circa $4.0bn of transactions.
  • The Retail sector sales were -20% lower than Q2, 2021 at $1.9bn
  • The Industrial market has seen the largest decline in transactions, down -68% on Q2 2021 to $2.0bn, continuing a trend from the start of this year.
  • The Development market has increased activity by 60% on the same period last year to $3.5bn.

The chart below shows the performance of each major sector of the Australian real estate market for each quarter over the past 5 years.

Chart 1

The Office market produced a consistent result with $4.7bn of transactions in the quarter, up from $4.1bn in the prior corresponding period.

The results include the pending $2.1bn sale of 121 Exhibition Street by Blackstone and Brookfield which Charter Hall & GIC were consummating. GIC pulled out of the deal and whilst Charter Hall signalled an intention to proceed, there is some doubt in the market that the deal will proceed at the same price. Clearly, without this transaction, the Office market results would be much lower.

The average reported yield across the Office sector softened by 30Bps to 4.7%.

Premium Subscribers can access and manipulate the charts at RESourcedata.

The Retail sector has also seen a fall in activity with $1.9bn of sales compared to $2.4bn in the prior corresponding period. We recorded 67 transactions through the period, compared to 43 in the pcp.

The largest Retail Centre sale in the quarter was acquisition of Homeworld Helensvale which sold for $300m. Other notable deals were Colonnades Shopping Centre in Adelaide which sold for $135m and Castle Mall, NSW which sold for $105m. Average reported yields for the sector were 5.0%.

Premium Subscribers can access and manipulate the charts at RESourcedata.

The Industrial market has seen the largest decline in transactions, down -68% on Q2, 2021 to $2.1bn.

A lack of quality stock and far fewer large scale portfolio deals is the key factor affecting the sector this quarter.

A transaction by Goodman (likely internal sale) of 3 Birnie Ave Lidcombe for $324m was the largest deal recorded followed by Blackrock Asia’s acquisition of 443 West Botany St Rockdale for $120m.

Yields have continued to remain the sharpest across the sectors at an average of 3.8%

Premium Subscribers can access and manipulate the charts at RESourcedata.

The Development market has increased activity by 60% on the same period last year to $3.5bn. The majority of development transactions are for large scale industrial precincts or house and land subdivisions in outer suburban areas, however the largest deal we recorded was of 9 Hunter Street Sydney which was acquired by the Sydney Metro Authority for $344m. The site will ultimately be transformed into a new Office development opportunity once a new metro station connection is built. The 2nd largest deal was the acquisition of 56 Ashmore Street Erskineville for $315m by Coronation Property.

Premium Subscribers can access and manipulate the charts at RESourcedata.


With interest rates tightening around the world, bond yields have pushed up much higher over the last quarter. The chart below shows the US and Australian 10 Year Bond yields as well as the RBA Cash Rate (pre the July rise). As the chart indicates, Bond yields, which are often regarded as a risk free rate, are heading back to 2014 levels of between 3% and 4%.

The Chart below shows the weighted average yields for each sector each from 2015 to 2022.

The reduction in interest rates and the risk free rate (ie 10 Yr Bonds) over the past 5 years has been the catalyst for sharper cap rates since 2019 however as this cycle reverses, cap rates will move also.

The Chart below shows the gap between the reported yields and the 10 year Bond Rate. Prime real estate investments typically sit at between 200Bps and 400Bps above the 10 year bond rate. As shown in the Chart, property yields in 2019 and 2020 sat well above the typical range. In 2021 however additional liquidity in the market pushed yields well down into the average band and the recent adjustment to Bond Yields has seen the Yield Spread fall further, now well below the typical range.

It is for this reason, that the largest investors are re-evaluating their acquisition assumptions and are unable to acquire assets in the current market. GIC’s decision to pull out of the acquisition of 123 Exhibition Street is a case in point.

Based on the above information, and assuming 10 year bonds remain at or below 3.5%, average cap rates will likely soften to between 5.5% and 6.5% for prime assets and higher for sub-prime assets.

Those who are currently acquiring assets below a 6% yield either have access to a strong rental growth scenario, are lowly geared, and are more likely to be able to hold for a long term or are just ignorant to the challenges ahead.